Corporate Groups
Article 11 gives foreign administrator authority to begin proceedings in Australia for the purpose of asserting control over any subsidiary either
incorporated here or which carries on business here.
Competition for control of the administration of any subsidiary can be resolved by the mechanism for identifying the “main proceeding”.
Cross – Border Insolvency
Conclusion
UNICITRAL Model Law:
(a) facilitates recognition of cross-border insolvency; (b) facilitates the protection of the debtor’s assets; (c) empowers the foreign administrator to institute
proceedings; and
(d) leaves open the possibility of the foreign
administrator assuming general responsibility for the administration of the estate in this country.
Corporations Law Seminar, April 2008 45 SPEAKERS NOTES FOR NATIONWIDE SEMINAR ON CORPORATIONS LAW -FEDERAL COURT
-2 APRIL 2008 Michael Hughes
Partner - Minter Ellison
At the recent 7th Annual Practice Insolvency Conference Matthew Brine presented a paper setting out the Treasury's current thinking on future directions in insolvency regulation. In it he said that the 2007 reform package will not be (in his words) 'Revisited in the near term. Rather, we need to allow some time for these reforms to be bedded down'.
That backdrop is important, because it means that the challenge of adapting our current laws to accommodate the turn around or rescue culture about which Steve Parbery and Richard Fisher have spoken, will again largely fall to the courts.
In the limited time available, I would like to make some comments about that and try to crystal ball gaze on the kinds of applications that are likely to be made by insolvency practitioners, including under section 447A.
By way of perhaps official recognition, insolvency practitioners welcome and appreciate the support and assistance that is be provided by the court, which is commonly engaged in applications of a kind I have just mentioned, but also for general directions and the like. The limits of what the court can do and in particular its desire to leave matters of a purely commercial nature to the insolvency practitioner is well understood. The extent to which the court will be asked to be more 'hands on', particularly because of the UNCITRAL reforms about which Richard has spoken will be interesting.
Our economy has changed very much over the last 15 years. The legal underpinnings for raising capital (both debt and equity) are more complex and have a more direct relationship with retail investors than ever before. Promoting a rescue culture therefore involves a careful balancing act between the interests of very diverse stakeholders.
The first concerns the restrictions imposed by lenders by Part 5.3A which only permits them to enforce their security, when it covers all or most of the assets and then only during the decision period. The additional exceptions are where the voluntary administrator consents or the Court's leave has been granted.
This issue will I think be played out against the backdrop of more recent lending practices where loans are often made not to a group, but to individual companies within it, which have been incorporated specifically to pursue a particular venture. These borrowers are sometimes described as bankruptcy remote, because they are intended to have no other liabilities, and for this reason there might be no charge, with the security being limited to the property and other assets which is being developed.
Plainly this was the lenders' bargain.
However, even where the lender does have all assets security, a practice has emerged of lenders not enforcing their security during the decision period, but instead asking for the voluntary administrator's consent purportedly under section 440B to enforce their security after it ends. These consents are of doubtful legal value for a number of reasons, so if the same outcome is to be achieved, there will be a need for the intervention of the court, as occurred in the voluntary administration of the Australian Capital Reserve/Estate Property Group.1 The commercial context of that matter was further complicated by the fact that the lender in question was itself in administration (representing the interests of the retail note holders), rather than a large financial institution able to take a commercial approach to such matters; although in the current
environment I do not see those circumstances as unique.
I raise this issue because practitioners often see value in there being some agreed extension in the decision period, so that the often multiple lenders into a complex group have more time in which to get comfortable that there is at least as good a chance of the lender getting their debt repaid by waiting for a global solution to be investigated and promoted by the voluntary administrator,
1
Australian Capital Reserve Limited (Administrators Appointed) v High Tower Investments Pty Limited (Administrators Appointed); in the matter of High Tower Investments Pty Limited (Administrators
Corporations Law Seminar, April 2008 47 than pushing for the separate enforcement of their own security either with the benefit of such a consent or the leave of the Court.
I concede that the reforms' extension of the decision period from 10 to 13 business days from the time when the lender gets notice of the voluntary administrators' appointment, should go some way to address this issue – and would I submit be a factor for the Court to take into account in its own consideration of the issue – but I do not think it will go away.
The second is in the area of so-called 'ipso facto' clauses.
In nearly all cases, there will be contracts to which the company is a party which is critical to its ongoing viability. Putting to one side the issue of leases or loan agreements, it might be a corporation whose sole business is to run the outsourced operation of some other concern. Again, this is a common feature of the contemporary economy. The appointment of a voluntary administrator might be the only event on which the counterparty can rely to affectively terminate the contract, and award it to someone else. The voluntary administrator may be able to secure working capital to enable the company to continue to perform all of its obligations under that contract. On the face of it, it therefore seems unfair that the counterparty can exploit the appointment, and terminate the contract, possibly for its own commercial benefit. Even if it does not do so, the ability to do it, can substantially hamper the voluntary
administrator's ability to sell the business and be confident that the contract can be assigned to the purchaser, on the same terms.
It is I think a large leap (to put it mildly) to expect the court to make an order under
section 447A, to any effect vary the operation of Part 5.3A insofar as an individual particular corporation is concerned so that the counterparty is no longer able to rely on a clause of this kind which was always a part of its bargain.
Nevertheless, it may not be a large leap for the court to be asked to grant relief, in the nature of relief against forfeiture to grant an injunction to restrain the termination of the contract, perhaps for a limited period of time, in the circumstances I have just described, namely that the contract
is in all other respects being performed and will continue to be performed during the course of the voluntary administration.
The third and final area on which I wish to mention is that of the likely intersection of the laws relating to the winding up of corporations, and those concerning the windings up of trusts. It might be thought that there is nothing new here legally, and this may well be the case, but the point I wish to highlight is the recent proliferation of trusts and sub trusts as vehicles which raise capital, pursue ventures or hold assets in a corporate group.
In the same vein, the Court will be aware through dealing with schemes of arrangements that in some case a shareholder will not only hold a share in a listed corporation, but an interest in an asset holding (trust) fund, to which that share has been stapled. The responsible entity will itself be a subsidiary of the listed vehicle. The corporation and the fund will often borrow money from different lenders for different purposes. In some case, the fund may have itself lent funds to the listed entity.
In the context of Richard's discussion about pooling, ordinary creditors of the corporation may have dealt with it on the basis that it had recourse to the assets of the fund. And there will be common directors and employees giving rise to issues of conflict of interest and the like.
The comment I make here, is that if there is to be an insolvency of such a group, I can readily see the Court being asked to take a role, especially in resolving issues as between competing
interests, and in connection with the fund.
As I said earlier, insolvency practitioners welcome and appreciate the support and assistance that is be provided by the court, and the issues I have just highlighted suggest to me at least that it will be being called upon again and more often in the not too distant future.
Corporations Law Seminar, April 2008 49